Whopper corporate tax breaks criticized

Sunday

Aug 31, 2014 at 12:01 AMAug 31, 2014 at 11:17 AM

WASHINGTON - Burger King's purchase of Tim Hortons and its plan to shift corporate headquarters to Canada doesn't mean you no longer will be able to get a Double Whopper with cheese in Columbus. But the merger might cost the federal treasury a few hundred million dollars in corporate taxes.

Jack Torry, The Columbus Dispatch

WASHINGTON — Burger King’s purchase of Tim Hortons and its plan to shift corporate headquarters to Canada doesn’t mean you no longer will be able to get a Double Whopper with cheese in Columbus.

But the merger might cost the federal treasury a few hundred million dollars in corporate taxes.

The move by the U.S. hamburger giant to acquire the Canadian-based doughnut and coffee chain is a vivid example of a growing trend by large American companies such as Eaton Corp. of greater Cleveland to take advantage of lower corporate tax rates charged by foreign governments, such as Canada, Great Britain and Ireland.

By doing so, Burger King will continue to pay federal corporate taxes on its earnings in the United States. But the new combined company could reap large tax savings because its earnings abroad will be taxed at Canada’s corporate tax rate of 15 percent.

“Canada — our socialist neighbor to the north with socialized medicine — has become the corporate tax haven,” said Edward McCaffery, a professor of tax law at the University of Southern California. “We’re not talking Cayman Islands and the Isle of Man. You are talking Canada. Canada is undercutting the corporate tax rate.”

To critics such as President Barack Obama, companies are gaming what he complains is an “ unpatriotic tax loophole.” In a recent news conference, Obama complained, “It’s not fair. It’s not right,” adding that the lost federal tax dollars have to “be made up somewhere, and that typically is going to be a bunch of hardworking Americans who either pay through higher taxes themselves or through reduced services.”

“And I think it’s something that would really bother the average American, the idea that somebody renounces their citizenship but continues to entirely benefit from operating in the United States of America just to avoid paying a whole bunch of taxes.”

For many economists, however, companies are simply responding to Washington’s inability to overhaul what many regard as a shattered U.S. tax code. As the rest of the world has lowered its corporate tax rates, the U.S. has maintained its 35 percent rate, although many companies pay a lower tax because of deductions placed in the code.

“What I find distressing is, corporate America has found the ideological divisions in Congress are too hard for them to address,” said Edward Hill, a professor of economics at Cleveland State University. “So they are saying, ‘We aren’t playing anymore.’?”Ken Mayland, president of the Cleveland-based economic forecasting firm ClearView Economics, said, “The law says you are required only to pay the taxes that you owe and not a penny more.

“It’s not as if (Burger King is) paying Canadian taxes on U.S. profits,” Mayland said. “They are paying U.S. tax rates on U.S. profits. But in order to compete, they want to pay the going rate in all these other venues.”

A number of lawmakers, including Rep. Pat Tiberi, R-Genoa Township, and Sen. Sherrod Brown, D-Ohio, are calling for major changes. But the two political parties are deeply divided on precisely how to overhaul the code.

Unlike many countries, the U.S. does not have what is called a territorial tax system, which means that American-based companies pay the U.S. corporate tax rate on money they earn in the United States and throughout the world.

In a recent opinion piece in Cleveland’s Plain Dealer, Sandy Cutler, chairman and chief executive officer of Eaton, wrote that “the United Statesis now the only major country in the world that taxes income not only in the United Statesbut also when earned outside the United States.”

To compensate, Eaton and other U.S. companies have engaged in a practice known as “inversion.” They can legally buy a foreign company based in a country with a lower tax rate, move the headquarters abroad and pay a lower corporate rate on its foreign sales.

Although Burger King has insisted that its purchase of Tim Hortons is designed to increase the company’s sales abroad, the tax savings can be enormous.

When Eaton, an aerospace and hydraulics company with $22 billion in yearly revenue, purchased Cooper Industries of Ireland in 2012, it located its headquarters in Dublin, Ireland. Eaton projected it would save $165 million in U.S. taxes in 2016. Yet most of Eaton’s senior officials still work at the company’s gleaming new building in the Cleveland suburb of Beachwood.

Critics such as Edward Kleinbard, a law professor at the University of Southern California, argue that large companies are taking advantage of a legal loophole that smaller American companies cannot possibly afford to.

In an opinion piece in July in The Wall Street Journal, Kleinbard wrote that “inverting firms try to justify corporate self-help as the right response, but inversions both gut the domestic tax base and allow key players (those with international operations) to excuse themselves from the debate, while domestic firms are left holding the bag.”

Kleinbard called for reducing the U.S. corporate tax rate to about 25 percent. But he also wrote that “Congress should enact a temporary law to preserve the status quo, and thereby the corporate tax base, by treating inversions according to their economic substance, and by foreclosing the ‘ hopscotch’ strategies described above. Without this, there will be no corporate tax base left to reform.”

Both parties say they want to lower the U.S. corporate tax rate. In an interview last week with The Dispatch editorial board, Tiberi, a member of the tax-writing House Ways and Means Writing Committee, backed a reduction in the U.S. corporate tax rate as part of a series of reforms that he said would encourage American companies to stay at home.

Brown, of Ohio, has called for a boycott of Burger King. But he also supports cutting the U.S. corporate tax rate to 25 percent while working with foreign countries to establish what his aides call “a country-by-country minimum tax” that would “close offshore havens.”

Economists are not sure Brown’s proposal is very practical. McCaffery of USC said, “You would have to get every country to sign off on it,” adding, “I’d say good luck with that.”

Dispatch Reporter Randy Ludlow contributed to this story.

jtorry@dispatch.com

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